In my April 18th post, I discussed the recent trend of municipalities enacting ordinances designed to give their code enforcement liens “superpriority” over prior-recorded mortgages. Basically, the municipalities have sought to achieve for their liens the same priority as that afforded liens for unpaid real estate taxes. In 2011, the 5th District Court of Appeal decided the case of City of Palm Bay v. Wells Fargo Bank, N.A., holding that the City of Palm Bay could not “…grant its code enforcement liens superpriority over a prior recorded mortgage…” That decision was appealed to Florida’s Supreme Court who issued its ruling on May 16.

Fortunately for lenders, the Court resolved this issue in favor of mortgage holders, holding that a municipality has no authority to enact and enforce an ordinance that creates superpriority for code enforcement liens over prior recorded mortgages. The Court found that because the Florida Legislature has established by statute the priority of rights with respect to interests in real property, municipalities were preempted from circumventing this general scheme by enacting their own ordinances to achieve superpriority.

With the Court’s decision in hand, title insurance companies and mortgagees should breathe a collective sigh of relief.

It is no secret that Florida consistently ranks among the worst states in the union in regards to the mire of the residential mortgage foreclosure case backlog. From 2007 to 2013, approximately 1.5 million foreclosure cases have been filed in Florida alone. As of February 2013, nearly 360,000 cases remained pending in Florida courts, and an estimated 680,000 new cases will be filed within the next three years. Clearly, something had to give.

On May 3^rd, the Florida Senate passed H.B. 87, and shortly thereafter on May 9^th, the Florida Supreme Court issued an order amending Rule 1.490 of the Florida Rules of Civil Procedure to allow general magistrates to handle foreclosure actions. The changes are effective as of the publication of the order.

General magistrates are members of the Florida Bar that have been appointed by the circuit Court to conduct civil hearings and prepare reports containing findings of fact, conclusions of law, and recommendations to the referring Judge, who reviews the magistrate’s report before it becomes final. Prior to the amendment of Rule 1.490, general magistrates were primarily utilized in family, juvenile and probate court matters. With the amendment of Rule 1.490, the chief judge of each judicial circuit may now appoint magistrates to handle “all actions and suits for the foreclosure of a mortgage on residential real property.”

Prior to the amendment of Rule 1.490, express consent by both parties was required for a matter to be referred to a magistrate. Consent for referral to a foreclosure magistrate, however, is now implied, absent a timely objection by either party. Thus, if a homeowner does not file an objection to the referral within ten days,[1] their case will automatically be assigned to a magistrate. Although language notifying both parties of the right to have their case heard by a judge must be included in every referral order, the small window to object ensures that this implied consent will be a tremendously contentious issue going forward.

An interesting provision in the amended Rule is that foreclosure magistrates cannot practice the “same case type” of law in the county where they work as they are appointed. While this portion of the amendment was certainly enacted to prevent conflicts of interests (as magistrates are bound by the same grounds for disqualifications as judges), the measure narrows the pool of qualified candidates to attorneys who (a) no longer practice foreclosure law, or (b) have never practiced foreclosure law in that jurisdiction.

Because the amendments were passed without a formal comment period, the deadline to submit written objections to the new procedures is July 8, 2013. These amendments represent a significant change in the landscape of foreclosure practice in Florida. The Florida Banking Law Blog will continue to monitor any developments as they arise.

When Hostess announced last November that it would be shutting the doors to its factories, spooked by the news and likely addled by decades of cream filling, hoarders of Ho-Ho’s scurried to buy every brand name snack cake they could find, boosting the online sale of Twinkies alone by 31,000% in the first twenty-four hours. Naturally, the hysteria caused a convergence of conspiracy theories from the Ding Dong devotees, and suspicions rose that the Mayan 2012 prophesies were coming true: the end of the Devil-Dog days was indeed drawing nigh.

Hostess, however, is not a newcomer to financial distress. Throughout the early 2000s, the company’s confectionary debts continued to Sno-Ball, forcing the troubled company to twice file for Chapter 11 bankruptcy relief. Although the owners and the workers’ union engaged in lengthy negotiations in its recent iteration of insolvency, unlike its Twinkies, Hostess could not be preserved indefinitely.

Today, however, those Cup Cake connoisseurs can breathe a collective sigh of relief. The snack cake Armageddon has been averted by the most unlikely hero: Judge Drain.

Indeed, on March 19, Judge Robert Drain of the U.S. Bankruptcy Court for the Southern District of New York approved the $410 million bid of private equity firms Apollo Global Management and C. Metropoulos & Co. for Twinkies and Hostess’ other snack cake assets. Metropoulos is no stranger to resuscitating long-neglected brands. The company scored a big hit with Pabst Blue Ribbon, which they acquired in May 2010 – decades after PBR’s market share had gone flat.

Section 363 of the Bankruptcy Code provides an effective mechanism for distressed companies seeking to sell their assets and for buyers looking to purchase assets at potentially bargain prices. Because the sale effectively takes the place of a plan and disclosure statement, bankruptcy courts take extra care to ensure that creditor’s rights are not lost in the process.

A properly conducted “363 Sale” benefits all major parties in a bankruptcy case. Debtors satisfy their fiduciary duty to maximize the value of assets for creditors, who also understand that in general 363 Sales are faster and more efficient than selling assets through a Chapter 11 plan. Secured creditors interested in purchasing the debtor’s assets have the option to offer the cancellation of debt as consideration for a bid, a practice known as “credit bidding”, and unsecured creditors may obtain a carveout from sale proceeds of the secured creditor’s collateral. Finally, the assets sold at a 363 Sale are acquired free and clear of liens or other claims.

Despite these benefits, 363 sales are not without their drawbacks. Thus, entities interested in purchasing a debtor’s assets through a 363 Sale should do so cautiously and with the guidance of an experienced bankruptcy attorney.

So take heart Hostess fans – if all goes as planned, Twinkies should be back in circulation by July 2013. What this means for the hearts and circulation of their consumers, however, remains to be seen.

One of the primary roles of a Chapter 7 trustee is to ensure that the bankruptcy estate is preserved prior to liquidation. It is no wonder, then, that the Trustee’s avoidance powers are well defined by the Bankruptcy Code. Nevertheless, a string of recent cases out of the Middle District of Florida has illustrated that a trustee is not given carte blanche to avoid all transfers that diminish the estate without first establishing that it has standing to bring the avoidance action.

Under § 549 of the Bankruptcy Code, a trustee may avoid a postpetition transfer that is authorized by the Bankruptcy Code or Court. To do so, the trustee must establish that the transfer actually injured or diminished the bankruptcy estate. Establishing a causal relationship between an unauthorized postpetition transfer and a diminution of the estate does not, at first blush, seem too onerous of a task. However, a string of recent decisions out of the Middle District of Florida in the Wood Treaters case have illustrated that even if the trustee can establish that the transfer was unauthorized, it still bears a significant burden to connect the individual transfer to a direct depletion of the estate.

In Wood Treaters, the debtor filed a Chapter 11 petition and was granted conditional permission to use cash collateral to make postpetition transfers. After the case was converted to Chapter 7, the trustee sought to avoid a number of the debtor’s transfers because they had not been made in strict accordance with the cash collateral order.

Though not condoning the debtor’s unauthorized transfers, Judge Paul M. Glenn found that the trustee had failed to establish that the bankruptcy estate suffered a direct injury as a result of any particular transfer. Specifically, Judge Glenn held that the trustee failed to establish that the goods purchased in any specific transaction (i) were not fair value for the purchase price, or (ii) were re-sold at a loss by the Debtor or the liquidator. This particularity requirement was especially vexing for the trustee, because the trustee did, in fact, introduce evidence that the aggregate effect of the transfers diminished the overall value of the bankruptcy estate.

Judge Glenn’s strict interpretation of § 549 is not universally accepted, although the preliminary holding in Wood Treaters has already been adopted by the Tenth Circuit Bankruptcy Appeals Panel, as well as two lower federal courts. The effect of holding that a showing of aggregate harm will not suffice to carry the jurisdictional burden in a § 549 avoidance action may be chilling to present avoidance actions, but establishing that the estate suffered a loss as a direct result of a particular transfer is certainly not outside the trustees’ collective wheelhouse. Because trustees must now scrutinize each postpetition transfer with greater specificity, Wood Treaters should ultimately prove positive for lenders and other creditors.

In a prior post, we discussed two of the four main components of HB 87, the foreclosure reform bill presently under consideration in Florida. The remaining sections of the bill which merit consideration involve a revised “show cause” procedure and provisions designed to protect third parties who have purchased foreclosed property.

The bill proposes to expand certain aspects of F.S. 702.10(1), an existing statute which establishes a procedure by which a court can require defendants in a real estate foreclosure action to “show cause” why a foreclosure judgment should not be entered, in effect, streamlining the process in certain cases. The bill allows not only a mortgagee, but also any defendant who is a lienholder, including homeowner’s and condominium associations, to request a show cause hearing. The apparent intent is to keep mortgagees from delaying foreclosure cases by making the show cause procedure available to other parties in the lawsuit.

Another change is to F.S. 702.10(2), which establishes a basis by which a mortgagee can request that the mortgagor show cause as to why it should not be required to make payments during the foreclosure case. The existing law is limited only to non-residential mortgage foreclosures. HB 87 expands its application to include residential property that is not owner-occupied.

The final major component of HB 87 purports to protect the interests of third parties who have acquired title to foreclosed property from subsequent lawsuits which could adversely impact their claim to title. The aim of the legislation is to prevent situations where someone later seeks to set aside or otherwise challenge the validity of the foreclosure judgment. The bill would mandate that many of those claims be treated as claims for monetary damages only and not claims which could challenge the title to the real property.

It is still early in the legislative process and there appears to be both significant support for, and opposition to, the bill. We will keep readers updated as to the bill’s progress.

I have recently encountered several situations in which local governments are claiming, under ordinances they have enacted, that their liens and fines have “superpriority” status over existing mortgages, regardless of when the liens were recorded and whether or not the mortgage holder ever was given notice of the liens. It seems that these claims are being made more frequently as municipalities explore all possible sources for increased revenue.

Municipalities generally have authority to enact liens under Florida Statute Chapter 162 which, in itself, does not provide for priority of the municipal enforcement liens. However, many municipalities have enacted ordinances purporting to give their liens superpriority, or, the same priority as is afforded liens for unpaid real estate taxes. Until recently, there has been little case law on the subject of whether a municipality can create its own superpriority lien status. As a result, title insurers would not insure over these liens and this frequently resulted in mortgagees simply paying the liens off to allow subsequent sale of foreclosed property.

Municipal code enforcement liens are examples of the type of liens commonly at issue. With the real estate collapse, the number of outstanding code enforcement liens and the amount of the typical lien has greatly increased. In fact, I recently conferred with a client concerning a municipality’s claim that its code lien had priority over the bank’s mortgage. Moreover, the lien amount had reached $375,000!

The priority of code enforcement liens was squarely addressed in the 2011 case of City of Palm Bay v. Wells Fargo Bank, N.A. The 5th District Court of Appeal held in that case that the City of Palm Bay could not “…grant its code enforcement liens superpriority over a prior recorded mortgage…” The court noted that to do so would conflict with a statute that says priority of mortgages and other liens will generally (with certain exceptions) be decided by “first in time, first in right” meaning in the order in which they are recorded. Unfortunately for mortgage holders, the Palm Bay case has been appealed to the Supreme Court of Florida where it is now pending. At this point we do not know whether the ruling in that case will ultimately remain the law in Florida. Several entities have filed amicus briefs in the case including the Florida Bankers Association, the Florida Land Title Association and the Florida League of Cities. We will monitor the case and provide an update in a future post in The Florida Banking Law Blog.

When an individual obtains a loan with no intention of repaying the lender, it is well established that such a debt is not dischargeable in bankruptcy. If, however, a debtor does not misrepresent its intent to repay the lender, but instead materially misrepresents the purpose of the loan, is the debt dischargeable in the debtor’s subsequent bankruptcy?

In the recent case of Johnson v. Dowling, 2013 WL 684681, W.D. Va. (2013), Judge Norman Moon of the Western District of Virginia held that when a debtor intentionally fails to use the proceeds of a loan as indicated, the resulting debt may not be discharged in a subsequent bankruptcy – even if the debtor intended to repay the lender at the time the loan was executed. This case is potentially significant for creditors and their counsel because it potentially reframes the question as to what constitutes fraudulent intent under § 523(a)(2)(A).

Although the Dowling court relies on similar opinions from the First, Sixth, Seventh and Ninth Circuits, courts within the Eleventh Circuit have not addressed this specific issue. The opinion most similar is In re Hendricks. In Hendricks, a debtor obtained a loan, but ultimately used the proceeds for a different purpose than his stated intention when he obtained the loan. Had the creditor successfully demonstrated that the debtor intentionally misrepresented the use of  the funds at the time the loan was made, the result would likely have been similar to Dowling. However, Judge Briskman of the Middle District of Florida held that the creditor failed to overcome its burden to prove the debtor’s fraudulent intent.

Certainly the Virginia opinion does not eliminate the “intent” requirement present in Hendricks. Instead, Dowling makes clear that when a borrower makes a false statement to obtain a loan, even one unrelated to default, the creditor bears the burden of proving that the statement was made “with the intent to deceive,” as required by § 523(a)(2)(A). Thus, Dowling merely extends the manner in which a debtor may deceive a lender under § 523(a)(2)(A) beyond simply the intent to use the funds for purposes other than those indicated at the time of the execution of the loan.

Many lenders will view the Dowling case as a prudent extension of § 523(a)(2)(A)’s non-dischargeability provision. Creditor’s counsel, however, should recognize that Dowling does not lower the bar on proving fraudulent conduct.  Indeed, creditors still bear the burden of proving the common law elements of fraud.  Dowling merely opens the door to additional considerations of a debtor’s intentional deceit in obtaining a loan. Regardless, Dowling provides an interesting approach to objecting to dischargeability of a debt under § 523(a)(2)(A) when the circumstances and evidence so permit.

Usury under Florida law is largely a matter of intent. It is not fully determined by the fact that the lender actually received more than law permits but by the existence of a corrupt purpose in the lender’s mind to charge more than the legal interest permitted by law for the money lent. In cases where the rate of interest charged was higher than the Florida statutes allow, Florida courts routinely find the issue of “intent” to be a determination for the trier of fact. This would reduce the likelihood of a lender obtaining summary judgment, at least in the early stages of litigation, prior to engaging in discovery.

In usury cases, Florida courts analyze the element of intent on the basis of good faith. Evidence of other loan agreements involving the lender can be used to prove whether the lender had the requisite intent. Most importantly, courts have held that the element of intent is lacking if the lender can prove that the usurious interest rate was demanded, or in some cases even collected, through inadvertent error.

This commonly arises in complex loan transactions and situations where interest has been miscalculated or where a borrower is in default under its loan documents and the lender fails to adjust its accounting method when charging the default interest rate. Thus, an otherwise non-usurious loan will not become usurious merely because usurious interest is claimed or demanded under it; rather, a borrower must prove that the lender intended to charge or collect interest in excess of the statutorily proscribed rates.

Moreover, in cases involving inadvertent error, lenders may be able to successfully defend against a claim of usury by including a usury savings clause in the loan documents.

I receive frequent inquiries from bank clients who are concerned because their mortgage borrower has requested permission to transfer the collateral real property to another entity. These requests commonly are made for estate planning purposes (though other reasons are often cited) and may involve transferring the property to other entities such as a trust. The banker typically wants to know whether they have to agree to the transfer, what happens to the mortgage if they do, and what documents are needed as a result. Before we answer those questions, lets explain the difference between a transfer of property “subject to” a mortgage and the transfer of property in which the transferee “assumes” the mortgage. In the first case, the new owner acquires title to the property but does not expressly agree to pay the mortgage debt. If the original mortgagor defaults, the new owner can be foreclosed but will not be liable for any deficiency. In the second case, a new owner that “assumes” the mortgage expressly agrees to pay the mortgage debt and would be liable for any deficiency.

With that in mind, to answer the first question of whether or not the bank’s consent to the transfer is required, we look to the loan documents and, particularly, the mortgage. Most mortgages contain “due on sale” provisions which would make such a transfer an event of default unless the lender agreed to it. In those cases, borrowers will usually request that the bank consent. Whether the bank grants the consent or not is again, subject to the applicable loan documents and its own internal guidelines and procedures. If the lender does grant permission for the transfer, the best practice is to document that and also provide that the lender is not waiving its right to enforce the due on sale provision of the mortgage in the event of future transfers.

Assuming the bank agrees and provided that the new owner does not assume the mortgage, any such transfer is “subject to” the mortgage. The title to the real property passes to the new owner but the mortgage lien stays intact and with priority as of the day it was recorded. As mentioned above, the new owner must rely on the mortgagor to make the payments or he can be foreclosed. In the typical transfer for estate planning purposes, the new owner is related to or controlled by the original mortgagor and may therefore be comfortable with that risk.

Regarding the third issue, if the transfer is subject to the mortgage, the best practice is to document that the bank is agreeing to the transfer but waiving no future rights. If the structure calls for the new owner to assume the mortgage, the lender should require a mortgage assumption agreement containing the express promise by the new owner to pay the debt secured by the mortgage. Keep in mind that the Florida Department of Revenue considers a mortgage assumption to be subject to documentary stamp tax and the tax due will be calculated on the outstanding principal balance being assumed.

When the time comes to collect a debt, few organizations are as accomplished as the Internal Revenue Service. The IRS showed just such guile in the case of In re Williams, a recent Chapter 7 proceeding in the Middle District of Georgia, in which the creditor raised an interesting, and more importantly, successful defense to a McNeal motion.

As in McNeal, the debtor was upside down on its mortgages, and it moved to strip off a second priority tax lien which was wholly unsecured by the debtor’s residence. In doing so, the debtor made a standard McNeal argument.

Not to be dissuaded by the McNeal motion, the IRS argued that although the tax lien was indeed unsecured with regard to the residence, a tax lien, by statute, attached “to all property and rights to property, whether real or personal, belonging to such [debtor].”  Thus, the court held that because the debtor’s personal property retained unencumbered value, a component of the IRS’s lien is partially secured by the debtor’s personal property – even if another component of the lien is wholly unsecured.  Because the lien remained partially secured, Dewsnup applied, not McNeal.

Although the IRS had not filed a separate proof of claim, the debtor in Williams had scheduled IRS as the holder of a single priority claim. The court noted that there was no basis within the Bankruptcy Code to divide the claim into separate claims for each type of collateral – real or personal property – just as Dewsnup did not permit separating claims into secured and unsecured portions for purposes of a strip-down in Chapter 7.

The court held that the IRS’s claim attached to the value of the personal property, even if it did not attach to any value of the debtor’s real property. Because the claim was allowed and secured under § 506(d), the Williams’ court was bound by Dewsnup – not McNeal. Thus, the court denied the debtor’s McNeal motion.

Williams is a simple, yet sophisticated strategy to defend against a McNeal motion under specific factual circumstances. Creditors with claims involving personal property, such as tax liens or those arising out of mortgages secured by UCC-1 financing agreements, et al., may also be able to successfully defend against a strip-off. Williams is the first case to raise the proposition under McNeal, and creditors and their counsel should examine any claims in pending Chapter 7 cases in which a McNeal motion is likely to be brought.